India's poor law

The Indian government wants to guarantee employment for the rural poor. Can it afford to do so?

AS THE devastating Indian famine of 1877-79 drew to a close, India's British rulers worried that their relief efforts might have gone too far. If the poor were entitled to relief in times of distress, the Famine Commission argued, they might soon demand relief at all times. India might get its own poor law—a prospect the niggardly Victorians could not “contemplate without serious apprehension”.

India's coalition government, the United Progressive Alliance (UPA), finds itself in the predicament the British Raj was so anxious to avoid. For decades, the Indian state has laid on public works in response to drought or flood, giving destitute farmers and labourers the means to buy food. One such drought in 1972-73 prompted the state of Maharashtra to go a step further: it issued a standing guarantee of employment, at the legal minimum wage, to anyone who wanted work. Now the UPA, which owed its surprise election victory last May in part to rural discontent, has promised to extend a similar guarantee to the nation.

To its advocates, a rural employment guarantee represents an historic opportunity to weave India's first reliable social safety net. Others, with an eye on the government's disquieting budget deficit, share the Victorians' serious apprehension.

The appeal of poor-law relief, according to John Stuart Mill, was that it is “available to everybody [but] it leaves to every one a strong motive to do without it if he can”. The state does not test a person's means, but by offering low wages in return for hard work it deters those who can support themselves. In theory, wages should be close to, but slightly below, the market wage. They should, as Mill said, “give the greatest amount of needful help, with the smallest encouragement to undue reliance on it.”

At its peak in the fiscal year 1985-86, Maharashtra's employment guarantee provided 189.5m man-days of work. Labourers turned to the scheme during lean times, then left during busy harvest periods. Some of the wages paid ended up in the pockets of corrupt local officials. But most studies suggest the guarantee targeted the poor rather better than India's other welfare schemes. India's food subsidies, for example, are often misdirected. One study found that over 30% of those who received a ration of subsidised rice and wheat were not poor, and about half of the poor received no ration at all.

If work requirements serve simply as a screening device, separating the indigent from the indolent, it does not much matter what labourers are paid to do. In Maharashtra, they have reportedly built rural roads that are washed away by the next monsoon. But the poor's labour does not have to be Sisyphean. Thanks to public works, mango groves, orange orchards and other forms of horticulture now cover almost 1m hectares of Maharashtra's soil, compared with just 173,000 hectares in 1990.

That said, the real value of the public works lies not in the orchards they plant, but in the safety net they provide. The rural poor, with little access to credit or insurance, have few opportunities to smooth their consumption in the face of misfortune. As a result, they tend to be conservative in their farming decisions, eschewing productive ventures that might raise the expected value of their income, but also raise its variance. Despite the clear risk of corruption by the officials administering it, an employment guarantee could give the poor something to fall back on. This might encourage farmers to take productive risks, such as experimenting with high-yielding seed varieties. It might spare them from distress sales of draught animals, keep them from pulling their children out of school and stop them from migrating to city slums.

But is a credible guarantee affordable? The UPA inherited a consolidated budget deficit of around 10% of GDP. Its public debt amounts to over 80%, though most of it is held at home, in rupees and at long maturities. An employment guarantee would increase this fiscal burden, but by how much?

A lot depends on the wages offered. The Maharashtra scheme pays the statutory minimum wage. Prior to 1988, according to a 1993 study by Martin Ravallion, Gaurav Datt and Shubham Chaudhuri of the World Bank, this state minimum was roughly in line with prevailing agricultural wages. In 1988, however, the minimum wage was doubled overnight. Many feared the fiscal consequences. Offering above-market wages is triply expensive. It attracts more workers, pays each of them more and displaces them from private employment.

Surprisingly, the fiscal burden actually fell after 1988—mainly because jobs were tacitly rationed. The World Bank authors showed that the scheme met only 43% of the demand for work that year. Newspapers reported slums “mushrooming” on the edge of towns. After 1988, Maharashtra's famous employment guarantee no longer guaranteed employment.

A three-pronged fork

Employment guarantees pose a policy “trilemma”. In principle, the Indian government might like to achieve three goals: an unconditional guarantee of employment, at the minimum wage, without busting the budget. In practice, it can achieve any two of those three. If it offers above-market wages, it can contain the fiscal cost only by diluting the guarantee.

The UPA originally promised to pay minimum wages, which are set by each state. It has now backed away from this commitment, reserving the right to set wages centrally. But the UPA has also diluted the guarantee. It offers only 100 days of work for one person per household. And, according to a strict reading of the draft law, the guarantee may only be enforceable for households officially classified as poor. India's poor law may thus come to rely on a means test, contrary to the spirit of Mill. With the budget deficit looming, the government's poverty-fighting ambitions may be giving way to its fiscal apprehensions.